94 MILLION OUNCES OF GOLD
"After drilling a thousand holes and collecting around 160 miles of rock cores, geologists believe Pebble contains 72 billion pounds of copper, 94 million ounces of gold, and 4.8 billion pounds of molybdenum"
The Case for Gold
George Austin didn't know what to make of the two men from Texas.
But the $250,000 check they handed him told Austin they were serious. And the men wanted to pay Austin at least another $100,000 over the next 35 years... a ridiculous sum of money in 1935.
For Austin, it was an astonishing change of fortune.
You see, George Austin owned the Jumbo gold mine. Of course, when these two men approached him, calling it a "mine" was generous. It was little more than a hand-dug shaft. But he'd found plenty of gold.
A year earlier, Austin was the struggling owner of a small store and hotel in Winnemucca, Nevada. Winnemucca was neither rich nor populous at the time, and Austin certainly wasn't wealthy. So when two prospectors came in with a wild story of a gold discovery, he jumped at the chance for a change.
He borrowed $500 cash to give the two prospectors a down payment and promised $10,000 to buy the discovery. He worked that claim for months, hauling the ore, busting his back carrying the loaded ore sacks. The discovery was so rich, he paid off those prospectors in no time.
Then word of the discovery broke, and things for Austin really changed for the better. When people heard there was gold in Winnemucca, Nevada, investors flocked to the small desert town. Among them were Texas oilmen J.K. Wadley and H.L. Hunt. But unlike most of the people who rushed headlong into the region, Hunt and Wadley came with a plan... and they came with cash.
Those two Texans wanted to work that mine. They wanted to haul food and supplies out into the wilderness. They wanted to blast rock, build shafts, and generally break their backs to get that gold. In addition, they were willing to pay Austin for that opportunity. The only thing Austin had to do was sit back and cash those golden paychecks.
That's how George Austin got out of the mining business and into the royalty business.
I really like George Austin's story. He turned a little bit of capital, some hard work, a little luck, and someone else's greed into a big score and rich revenue stream.
Because the market wants gold right now, we have a similar opportunity today. The price of bullion is soaring, gold coins are in short supply, and everybody is talking about it.
Right now, we have an unbelievable opportunity to buy into the largest unmined gold deposit in the world.
The Case for Gold
Gold is clearly in an uptrend and in line for huge price increases... The reason is inflation.
Whenever the government goes about printing large volumes of new money – and $1.5 trillion in bailout and "stimulus" packages qualify as "large volumes" – the value of gold spikes. You see, unlike dollar bills, the supply of gold is finite. It can't be created on a printing press. That also means, if you double the number of dollars in circulation, it costs twice as many to buy the same amount of gold.
The money supply increased 10% in 2008, and the price of gold increased 14%. But since the start of 2009, the price of gold is up another 10%. The government doesn't report money data on a daily basis. But between the $700 billion bank bailout the Obama administration will finish distributing and its newly minted $787 billion economic stimulus package, the gold price sure appears to be tracking money supply.
And the price of gold has historically reacted much more strongly to increasing money supply. Over the last decade, the U.S. money supply rose 86%, while the gold price rose 208%. (Of course, the costs of mining – for instance, oil and gasoline – have fallen, too.)
That's why we're going to make a fortune in gold stocks over the next year. The market will continue to react to the ever-growing number of dollars, pounds, and francs... which will drive the price of gold continually higher.
This is the big score – 94 million ounces of gold. And it's not located in some far-off, undeveloped, unreachable part of the world. It's right here in the United States.
In the gold industry, a 5 million-ounce deposit is enormous. We're buying one nearly 20 times larger. We get the rights to half that project with no strings. The deal includes no special clauses that let our partner walk away with 90% of the project. We own half, period.
And at a time when gold trades for about $950 an ounce on the spot market, we'll pay less than $10 an ounce for the gold in the ground.
This kind of opportunity is like finding a wad of hundred dollar bills washed up on the beach. It never happens, and yet, here it is.
Here's how we have the opportunity. The property is not only the world's largest unmined gold deposit, it's the world's second-largest copper resource... 72 billion pounds of copper. But the price of copper fell 64% since April 2008, so investors have decided they're uninterested in the project. That's the only reason the company that owns the deposit is this cheap right now. It's like everyone has forgotten it has any gold at all.
Well, not quite everyone has forgotten. Mining giants Rio Tinto and Mitsubishi recently bought into the project... at nearly twice the current price (and I think even that was a bargain).
Today, we're going to follow Rio Tinto's lead and buy Northern Dynasty Minerals (AMEX: NAK) and its Pebble project for less than $9.55 per ounce. Let me explain what we're getting...
The Ring of Fire Yields
a Giant Gold Deposit
Northern Dynasty is a small Vancouver, Canada-based mining company with a single asset... Pebble. And if you had to bet your fortunes on a single asset, this is the one you want.
Pebble lies along the "Ring of Fire" – the necklace of volcanoes surrounding the Pacific Ocean. These volcanoes mark cracks in the planet's geologic plates where thick pieces of the oceanic crust are sucked into the Earth to be recycled. What matters to us is the process creates some of the world's largest gold deposits.
Freeport-McMoRan's giant Grasberg deposit – it holds 93.2 billion pounds of copper, 230 million ounces of silver, and 41 million ounces of gold – is located on the Ring of Fire. So is nearly every large gold and copper deposit in South America.
Northern Dynasty's Pebble deposit is the first of these giants discovered in Alaska. It sits about 230 miles southwest of Anchorage on the coastal plain. It is the fifth-largest deposit of copper and the largest unmined gold deposit in existence.
Millions of years ago, super-hot water rose up through the deep Earth and flooded a huge region of rocks – 39 square miles are exposed today. The water carried billions of pounds of copper and millions of ounces of gold. As it cooled, it left behind the copper and gold in place of the rock it dissolved. The metal concentrated into one giant deposit... Pebble.
After drilling a thousand holes and collecting around 160 miles of rock cores, geologists believe Pebble contains 72 billion pounds of copper, 94 million ounces of gold, and 4.8 billion pounds of molybdenum. Not all of that metal will be recovered in a mine, but it's a good place to start.
You can see how immense this project is when you put it in terms of production. The proposed mine could produce 25% of the U.S. copper demand for 50 years. It would produce 10% of the world's current molybdenum production every year for 50 years.
And it could produce 1.1 million ounces of gold per year for 50 years. That would make it the fourth most productive mine in the world.
How much is that worth? A lot more than the $9.55 an ounce it trades for today...
With less than $500 million in market cap, Northern Dynasty is a junior miner (compare that to $20 billion gold giant Newmont Mining). Typically, a junior mining company has no earnings coming in the door. That's the case here, too.
So Northern Dynasty's cash hoard and debt are critical numbers to our investment. We need to be sure it has enough cash to keep the lights on and pay for whatever exploration or development plans it has. Otherwise, if the cash runs out, the company faces one of three options: It can load up on debt, issue more stock (diluting the value of your shares), or go under.
Northern Dynasty is not in danger of any of these...
The company has to do little more than pay salaries while its partner builds the mine. Northern Dynasty owns 50% of the Pebble project. Its partner is $18 billion mining behemoth Anglo American. To earn its 50% stake, Anglo must spend $1.5 billion on the project. Northern Dynasty doesn't have to contribute a cent while Anglo does all the work.
As a result, Northern Dynasty carries zero debt and $40 million in cash. That's more than enough cash to get it through the next few years. You could not ask for a better financial situation for a junior minor.
Northern Dynasty is actually a publicly traded subsidiary of the Hunter Dickinson Group (HDI), a private mining and exploration company. HDI has a 25-year history of managing companies and projects. More importantly, HDI has an incredible list of successes with companies just like Northern Dynasty.
HDI Company
Project
Gain
North American Metals
Golden Bear Mine
900%
Continental Corp.
Mount Milligan
1,800%
El Condor Resources
Kemess Mine
1,450%
Detour Gold
Detour Lake
521%
The executive chairman of Northern Dynasty is Robert Dickinson, cofounder of HDI and a 40-year veteran of mineral exploration. He personally owns 3% of the company (and bought more shares in December 2008). Insiders own 10% of the company, which means they'll do what's right for shareholders – because they are shareholders.
Just as important, partner Anglo is telling us it thinks our half the deposit is worth $1.5 billion... and we're buying it for less than $500 million.
How We'll Benefit
We have today's opportunity largely because of Northern Dynasty's decision to tout Pebble as a copper project. Given the global economic boom of 2004-2008, which drove copper prices up 250%, it made sense to highlight Pebble's 72 billion pounds of copper.
But the global economic meltdown has changed everything. The economic crisis has weakened investors' belief in China's ravenous consumption. Copper has fallen 64% from a high around $4 per pound in April 2008. And it's not alone. With diminished industrial demand, base metals in general are slumping.
Copper just isn't high on investors' radar screens anymore. It's so bad, shares of Freeport-McMoRan, the world's second-largest copper producer, fell 84%, from $125 down to around $16. The company also holds the world's third-largest gold resources. Even if you only value the gold (and ignore its 94 billion pounds of copper), this company's gold ounces are cheaper than the seven largest gold miners.
The market has marked down Northern Dynasty because it's seen as a copper company. That's our opportunity... but it won't last long.
To see Northern Dynasty's potential, take a look at how current nonproducing gold resources are priced in the market:
Company
Market Cap
Gold Resource (oz)
Price per Ounce
Orezone Resources
$320 Million
5.6 Million
$57
Great Basin Gold
$328 Million
12.1 Million
$26
Novagold Resources
$552 Million
21.8 Million
$25
Seabridge Gold
$687 Million
26.1 Million
$26
Northern Dynasty
$449 Million
47 Million
$9.55
As I said, none of these companies are producing gold right now. But Iamgold recently bought Orezone Resources for $57 per resource ounce, which sets our benchmark for Northern Dynasty... At $50 per ounce, we'd make 423% on our investment.
I think the Iamgold/Orezone deal represents the first in a wave of consolidations coming to the gold industry. As gold prices climb while share prices languish, it's cheaper to buy another company's assets on Wall Street than to find your own in forgotten corners of the world.
According to Brent Cook, author of Exploration Insights and one of the world's most knowledgeable mining geologists, major gold companies raised more than $3 billion so far in 2009. Newmont Mining raised $1.7 billion by selling shares and convertible bonds. The rumors in Vancouver are swirling around which companies are going to be takeover targets. One thing we know about major miners – they want giant deposits.
That's what led Goldcorp to buy Gold Eagle for $1.5 billion. Gold Eagle had a small, high-grade project called Bruce Channel that will hold somewhere around 6 million ounces. That works out to a stunning $250 per ounce.
Now, Pebble and Bruce Channel are very different kinds of assets, and I don't think Northern Dynasty's project will go for that kind of premium (though who knows how desperate the major miners will get). My point is, gold assets are not going to sell for less than $10 an ounce six months from now.
The two companies most similar to Northern Dynasty are Seabridge Gold and Novagold Resources. Both own large gold projects, and the market values both their assets – which require several entirely separate mines and will be much more expensive to develop – at three times more than Pebble.
Quite simply, Northern Dynasty's gold sells at a ridiculously cheap valuation today. If you valued Northern Dynasty's resources at $25, the company's share price would rise to $12.70. That's a 162% gain from here.
We have an unbelievable opportunity right now. Northern Dynasty's stated goal is to sell its share of Pebble to a major mining company. That's great for us, since this is a massive project that could take forever to begin production. That's not our investment plan.
One large hurdle the eventual owners of Pebble must grabble with will be permitting. On one hand, Alaska is a pro-mining state that has never rejected a permit. On the other hand, this project is near sensitive salmon fisheries. However, these concerns are years down the road. We'll make our money and be out of the trade long before this wrangling begins. We want Northern Dynasty to be bought out at a premium to our investment. The way the gold price is soaring, it will probably happen sooner than later.
The two largest shareholders of Northern Dynasty are Rio Tinto (19.8%) and Mitsubishi (which just increased its holdings in January 2009 to 11%). The average price for both companies was around $10 per share of Northern Dynasty. That means both companies believe Northern Dynasty's ounces are worth around $19 per ounce. In other words, Mitsubishi and Rio Tinto believe Northern Dynasty is a good investment at twice the current share price.
If a gold miner makes an offer for Northern Dynasty, expect Mitsubishi and Rio Tinto to drive up the price – either by blocking the bid or by making a counteroffer. A bidding war like that would be in our best interest. I expect its share price to settle between $10 and $30 before it is bought. Shares of Northern Dynasty were as high as $15 in July 2007 – I don't think that's out of reach again.
Regardless of what happens, we're buying the world's largest undeveloped gold resource for less than $10 per ounce. It's tough to go wrong buying gold at 1¢ on the dollar.
Action to take: Buy shares of Northern Dynasty Minerals (AMEX: NAK) up to $5 per share and use a 50% trailing stop. Remember, this is a fairly small, illiquid stock. Do not use a market order for these shares. Buy them using a limit order. If the shares run up past our buy-up-to price, be patient. This stock is highly volatile. You'll have more than one chance to buy at a favorable price.
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